Relief for Private Discretionary Trusts: Kolkata ITAT Rules that Surcharge is not automatic for income below ₹50 Lakh

 Recently, the Kolkata Bench of the ITAT has ruled that surcharge is not leviable on a private discretionary trust taxed at the maximum marginal rate (‘MMR’) where the total income is below ₹50 lakhs. The Tribunal held that the definition of “maximum marginal rate” under section 2(29C) of the Income-tax Act, 1962 requires reference to the Finance Act rates, and surcharge becomes applicable only when the prescribed income threshold is exceeded.

In the present case, the assessee, a private discretionary trust, filed its return declaring total income of ₹4,56,900 and computed tax without surcharge. Subsequently, while processing the return and rectification, the AO levied surcharge at 37%, raising additional demand. The Commissioner of Income Tax (Appeals) upheld the levy, holding that the maximum marginal rate includes surcharge. Aggrieved, the assessee preferred an appeal before the ITAT, contending that surcharge is leviable only when income crosses the statutory threshold specified under the Finance Act.

Upon hearing the matter, the ITAT observed that private discretionary trusts are generally taxed at the maximum marginal rate; however, such rate must be determined with reference to the Finance Act provisions. The Tribunal relied on the Special Bench ruling in Araadhya Jain Trust vs. ITO, wherein it was clarified that surcharge cannot be automatically applied at the highest rate and must instead be computed based on the applicable income slabs specified in the First Schedule to the Finance Act. Since the assessee’s income in all relevant years was below ₹50 lakhs, the statutory threshold for levy of surcharge was not met. The Tribunal further noted that interpreting MMR to always include surcharge at the highest rate would render the surcharge provisions redundant and lead to an absurd interpretation. Accordingly, the Tribunal directed that tax be computed at 30% plus applicable cess, without surcharge, and allowed the assessee’s appeal.

This ruling carries provides clarity to private discretionary trusts that surcharge is not automatic merely because income is taxed at the maximum marginal rate, instead the applicability of surcharge must always be evaluated with reference to the income thresholds prescribed under the Finance Act. Additionally, this decision reinforces the principle that statutory provisions governing surcharge must be interpreted harmoniously with slab-based thresholds rather than applied mechanically at the highest rate.